Fed vs BoE: Contrast in policy could hit pound

The Bank of England's (BoE) forward guidance marks a divergence in policy from the U.S. Federal Reserve - a rare event in economic history which points to "pronounced" sterling weakness, according to HSBC.

David Bloom, HSBC's global head of FX research, said BoE Governor Mark Carney was "as dovish as he could be" on Wednesday, when he unveiled plans to leave the country's bond buying program and interest rates untouched until its unemployment rate fell to 7 percent. Carney also outlined three caveats – known as "knockouts" – to that pledge: above-target inflation; unanchored medium-term inflation expectations and any threat to financial stability.

"Given uncertainties and the various 'knock-outs,' guidance so far out can't be fully credible," Bloom wrote in a research note on Friday. "The near-term implications are clear though: policy will be loose for a long time despite the recent strong data."

By contrast, the U.S. is "clearly taking its foot off the accelerator" with regards to monetary policy, Bloom added, with Federal Reserve Chairman Ben Bernanke repeatedly discussed paring back its massive monetary stimulus program.

Bloom said that although the market has doubted the ability of the BoE's Monetary Policy Committee (MPC) to remain dovish - given the strength of recent economic data – if the country's policies do diverge, it would be negative for the pound.

"History shows… that it is very rare for monetary policy in the U.K. and the U.S. to move in opposite directions, but when it does the impact on GBP-USD is pronounced," he wrote.

He highlighted a number of examples when policies contrasted and the impact it had on cable (sterling versus the dollar).

"One period of contrast is evident in 2005, when the Fed was hiking rates but the BoE cut rates by 25bps at its August meeting in response to the slowest pace of economic growth since 1993. Here the Fed was still in a tightening cycle whilst the BoE cut," he said.

"The impact on GBP-USD was marked, but it is important to recognize that the price impact occurs not in response to the actual changes in policy but rather in response to expected changes in policy."

Following a rate cut by the BoE in 2005, sterling fell from 1.78 to 1.72 against the dollar by the end of the year.

Bloom's team analysed various combinations of data outcomes from both countries - ranging from "terrible" to "excellent," and argued that almost all pointed to additional pound-dollar weakness.

"The path of policy in both countries will be determined by the economic data [and] we do not believe the current situation of excellent U.K. data coupled with moderate U.S. data will persist," he said. "Once the dust has settled we believe the U.S. will be tapering and U.K. rate rises will be a long time in coming – a situation that will slowly but surely undermine GBP."